Too many Canadians forget that there's more to the world of finance than the Big
Five Banks. Canadians are so programmed to think about banks when it comes to
mortgages that some give up their real estate dreams if the bank turns down
their mortgage application or offers them a smaller mortgage than they hoped
for.
When one of Canada's Big Five Banks considers a mortgage application, they all
want two questions answered:
#1. What is the borrower's ability to service the debt, that is, repay the
amount borrowed "the principal" and pay the interest due on the outstanding
balance?
Canadians banks set their Gross Debt Service (GDS) ratio at about
28% to 34% of your total before-tax income(s). This means that combined
principal, interest and property tax payments must be less than about one-third
of your allowable income. However, vulnerable income such as rent from an
illegal apartment will probably not be accepted by banks, which may mean a
smaller mortgage than you need.
#2. What is the lending value of the real property, that is, the price the
real estate would sell for within a relatively short time, usually 60 to 90
days, even in a weak real estate market?
Lending value is a conservative estimate and not automatically equivalent to
sale price. Be careful if you get caught up in a bidding war and pay a lot more
than list price.
Even if you expect the bank to say "yes," you may want to consider the borrowing
suggestions below:
Widen your search. That's just one bank, talk to the rest, too. Make sure you explore other
financial insititutions, too - trust companies, insurance companies, credit unions...
Mortgage Brokers make it their business to find money
Even though mortgage brokers often charge a fee, they may still be a
cost-effective alternative:
- Dealing in volume means they can often negotiate a better interest rate than you can with your one mortgage.
- They shop commercial lenders and private investors to find you a good rate and more flexible qualification criteria, which saves you time as well as money.
Reach into your own pockets with The RRSP Home Buyers' Plan (HBP) Revenue Canada allows you to withdraw up to $20,000 from your registered retirement savings plans (RRSPs) to buy or build a qualifying home. Repayment can take place over 15 years. Contact Revenue Canada or your accountant to make sure you are clear on the complexities and the paperwork before you dive in.
Explore employment benefits. Check with your employer or human resources department to find out whether there is an employee mortgage program or a home-buying assistance plan. If your employer has a good relationship with a particular lender, reduced mortgage rates or other privileges may be possible for employees.
Explore seller financing. If the home seller intends to invest most of the proceeds of the sale, it may be
possible to arrange some or all of the mortgage privately by offering the seller an attractive investment proposition.
Borrowing from relatives The success of this approach depends on your relationship with your family. Do
insist on doing everything in writing for your sake and the lender's. Some intra-family mortgages are interest-free since interest is taxable income.
If you can't arrange the financing you need at a reasonable cost, rethink the
purchase. You'll still have furnishings to buy, moving costs to pay and living
expenses to cover. Stretching yourself to the financial limit can take the edge
off home ownership.
More Canadian Topics:
B.C. Legion behind "Build it For Ourselves" Housing
That New Home Aroma May Disguise Bad Air
Technology Reinvents Canada's Real Estate Boards
Don't Overimprove Your Greatest Tax-free Investment
Published: September 28, 1999
Use of this article without permission is a violation of federal copyright laws.
 Futurist and Strategist PJ Wade is "The Catalyst" -- intent on "Challenging The Best Become Even Better." PJ earned this title by translating the dynamic impact of Boomers and their multi-generation families into relevant insights that start people thinking and taking action—in business and in life.
Author of 7 books and more than 1600 published articles, PJ encourages individuals to become their own futurist. PJ writes and speaks about the insight, knowledge and solid decision-making skills that professionals and their clients need to live and work in this vortex of change. For instance, since PJ knows that home is headquarters for the new decades-long "unretirement," she wrote the popular book "Reverse Mortgages: Best Friend, Worst Enemy... Your Choice! (CatapultPublishing.com), which is filled with suggestions and insight on protecting and using home equity. Her new business book, "What's Your Point?," which identifies 7 common mistakes professionals unknowingly repeat to their detriment, will be published in 2009.
As The Catalyst, PJ provides strategic communication, client appreciation and advanced education services to the financial, tourism, lifestyle and service sectors -- and the clients they serve. A frequently-quoted financial and business commentator, PJ is a thought-provoking strategic speaker who offers practical, real-life suggestions on leaving "the box" behind and embracing Forward Thinking -- a talent she regularly demonstrates in this column. For more on blogs, books and topics, visit TheCatalyst.com. |
